Protocol math (Ethereum)
Interest rate models in use for EVM protocol
Last updated
Interest rate models in use for EVM protocol
Last updated
This current state of supply and demand for liquidity is measured with the utilisation rate, in other words, how much of the supplied liquidity is being borrowed (utilised) by borrowers. The higher the utilisation rate, the higher the interest rate in a lending market.
The protocol has built in incentives in the interest rate model. To be capitally efficient, it sets an optimal utilisation rate. Below this rate, the protocol will incentivise utilisation, above this rate and it will disincentivise utilisation.
Two different slopes are used to measure interest rates, one for when utilisation is below optimal, and one for when it is above the optimal rate.
When not enough borrowers are borrowing available liquidity, the interest rate will be calculated as such:
When too many borrowers are borrowing available liquidity, the interest rate will be calculated as such:
Honey Finance lending markets use the following parameters as default:
You can try these parameters out for yourself and test models .